Consideration of control environment and fraud risk: A set of instructional exercises

Control environment is an abstract concept that can be difficult for students to grasp due to their lack of real-world experience. Recent accounting scandals and the regulatory response of the Sarbanes–Oxley Act of 2002 have highlighted the need for future auditors to be able to recognize red flags indicating the possibility of fraudulent financial reporting (FFR) and misappropriation of assets (MOA). This manuscript contains a set of four instructional exercises. The exercises are designed to promote critical thinking by exposing students to scenarios that require them to assess and integrate evidence regarding hypothetical clients’ control environments. Evidence is collected in realistic working papers (accessed via the web at http://www.pages.drexel.edu/~cpa22/Audit/audit.htm) that are based on evidence-gathering questionnaires from Big Four accounting firms. Using this evidence, students consider the risk of FFR and MOA. Student reaction to using the exercises, from three different institutions, has been positive.